A contractor is required to provide a payment bond equal to 100% of the contract value. If the contract amount is $750,000 and the bond premium is 1.2% annually, what is the annual cost of the payment bond?
Correct Answer
B) $9,000
Payment bond cost = Contract amount × Bond percentage × Premium rate = $750,000 × 1.00 × 0.012 = $9,000 annually. The bond amount equals the full contract value at a 1.2% premium rate.
Why This Is the Correct Answer
The correct answer is B ($9,000) because payment bond cost is calculated by multiplying the contract amount by the bond percentage by the premium rate. Since the bond is required at 100% of contract value, we calculate $750,000 × 1.00 × 0.012 = $9,000. The 1.2% premium rate must be converted to decimal form (0.012) for the calculation.
Why the Other Options Are Wrong
Option A: $7,500
Option A ($7,500) represents only 1% of the contract value, which would be the result if someone incorrectly used 1% instead of 1.2% as the premium rate.
Option C: $12,000
Option C ($12,000) would result from incorrectly calculating 1.6% of the contract value, possibly from adding percentages incorrectly or misreading the premium rate.
Option D: $15,000
Option D ($15,000) represents 2% of the contract value, which would occur if someone doubled the premium rate or confused it with a different type of bond premium.
Memory Technique
Remember 'CPP' - Contract × Percentage × Premium. Always convert percentages to decimals and multiply all three components together.
Reference Hint
Florida Building Construction Standards - Chapter on Bonds and Insurance Requirements, or Business and Finance section covering surety bonds
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